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Taxes

With W-2s and other tax forms now appearing in our mailboxes (or inboxes) daily, chances are that taxes are on your mind. If you believe you’ll owe money to the government, it makes sense to put off filing as long as possible, up to this year’s filing deadline. If you expect to receive a refund, however, file your taxes early to receive your money faster.

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Previously, H&R Block offered a product that allowed customers to get their refund even faster than the few weeks the IRS takes to process. However, they no longer offer these (though, you can sign up here to be first in line when they begin offering the Emerald advance lines of credit again). While you can find anticipation loans through third-party companies, these are typically accompanied by high fees. So, as of now, the least expensive and quickest way to receive a refund is to allow the IRS to deposit your refund directly into your bank account.

Regardless of how you receive your refund, you can file online using H&R Block’s system if you’d prefer to not visit a local office in person (buying a software package is one more option you have, too!). Here is what you need to know about filing online.

Different editions available

H&R Block offers three tiers of their online filing system in 2017 (for filing your 2016 taxes).

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If you haven’t noticed, it’s tax time. I have noticed, not only because of the endless emails I receive reminding me of this grand celebration, but also because of the people with whom I interact. As those I know complete their tax returns, I observe their pure joy as they realize they’ll be receiving a refund from the IRS.

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Count me in with the masses; my accountant suggested some changes to my tax returns for the past couple of years, and I received several refunds I otherwise wouldn’t have expected. I exuded an appropriate level of joyfulness, as well.

Most people’s tax situations are much simpler than mine. For example, a single guy might work for only one employer, receive one W-2 form, and won’t have much un-withheld income. He will probably receive a small refund. Or a family receives two W-2 forms and, because they didn’t calculate their withholding correctly, they’ll receive a large refund. Cue cheers of joy!

Except, the federal government should be the one celebrating. They’ve been using “our” money — money belonging to those of us who are due a refund — for free! Usually, when you lend money to someone, you charge interest to compensate yourself for its use. Why would you give the government, an organization that will use your money in ways you may not approve, a free ride?

The most common explanation — or rationalization — for not being concerned with lending money to the government for free is simple. It’s because this creates “forced savings.” By having more money than necessary withdrawn from each paycheck, you are automatically putting some money aside for later. You’re just counting on the government to pay you back on time, of course (and without interest).

It might be a good idea to note that some state governments are not issuing refunds on time. The states’ financial difficulties will become your financial difficulties when they delay sending you the “savings” you’ve been counting on.

Even if your return arrives lightning quick and without problem, it’s still a ridiculous situation. But, most of us stand for it, year after year. Why don’t we break the cycle of free loans to the government, then strange joy when our money is returned?

Let’s start with the typical rationale. Here’s why “forced savings” is a poor excuse:

  • You are not earning interest. In a high-yield bank account like Barclays, the money could earn interest. If you hand excess money to the government each pay period, the government gets to keep any interest it could be earning. You might as well throw money out the window.
  • You don’t have use of the money. The average tax refund, for those who receive one, is almost $3,000. You could have used that money to pay off your debt, repair your house, or invest for your retirement.
  • Saving yourself isn’t difficult. Don’t rely on the government for a savings plan. You can automatically transfer a portion of your paycheck into a savings account, and not even think about it (essentially, the same thing you’re already doing). When you re-calculate your withholding and change the form with your employer, set up direct deposit so you receive your pay directly in your bank account. Then, set up an automated recurring transfer to move a portion of your pay into a savings account that’s earning interest.
  • It’s easy to treat a refund wrong. Receiving a large check from the government encourages people to make unnecessary or unplanned purchases. While that might be great for the economy in general, you might be making choices you wouldn’t have been if that money was spread out over the course of the year. If it were incorporated into your weekly or biweekly income, you would be more apt to budget it wisely.

The federal government counts on millions of citizens overpaying their taxes throughout the year. In fact, if everyone optimized their withholding, the government might not be able to pay for its day-to-day operations. But you don’t need to worry about what the government will do in that situation. The best decision for your financial health is to optimize your withholding so you do not receive a substantial refund.

In fact, you should consider planning your withholding so you owe the government when you file your taxes. In this scenario, all the drawbacks mentioned above become your advantages. You’ve had access to government money throughout the year. As long as you stay within limits, you won’t owe the government any interest or fees. You can even earn interest or invest the government’s money, tucking that cash into an interest bearing account, ready to pay your tax bill when it comes due.

Of course, be sure to keep track of approximately how much you’ll owe, and never put yourself in a situation where you cannot pay your tax bill by the deadline in April. If you’re going to avoid a tax refund, you need to be smart and not create a bigger issue. But, as long as you can pay your bill by April 15 (or April 18, as it is this year), the government doesn’t care what you do.

 

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philadelphia-beverages-taxLast year, the city of Philadelphia decided to pass into law a “beverage tax,” which taxes the sugary drinks you consume at the rate of 1.5 cents per ounce.  At the time, there was some considerable outcry from residents of the city. Nevertheless, the government stuck to their guns.

Well, at the turn of this new year — on 1/1/2017, in fact — the tax was enacted. Consumers are quickly feeling the effects, and are none to happy about it.

What It Is

Taken directly from their city government website, Philadelphia lawmakers explain where the tax is to be levied.

The tax is not just on sodas. This tax is on any non-alcoholic beverage, syrup, or other concentrate used to prepare a beverage that lists as an ingredient any form of caloric sugar-based sweetener, including, but not limited to sucrose, glucose, or high fructose corn syrup.

Drinks considered “diet” or “zero calorie” are also taxed. Specifically, this tax is on any non-alcoholic beverage, syrup or other concentrate used to prepare a beverage that lists any form of artificial sugar substitute, including stevia, aspartame, sucralose, neotame, acesulfame potassium (Ace-K), saccharin, and advantame.

A quick look at social media shows hundreds of posts today from people taking screenshots of their receipts to show just how much this tax will actually cost you.  You hear the details of 1.5 cents per ounce and might not think much of it. When you start to buy gallons, six packs, 12 packs of your favorite soda or sports drink, though, you’re going to pay quite a bit more than you expect.  Let’s have a look at an example.

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On the receipt above, you’ll notice a consumer purchasing a 10 pack of Propel Water (w/ Berry) for a retail price of $5.99.   These are just over 20 oz. a bottle, so the pack is a little over 200 oz. of total liquid. At a tax rate of 1.5 cents per ounce, the consumer ended up paying $3.04 just in the beverage tax alone.

Then, because democracy is so awesome, the sales tax is added AFTER the beverage tax. This means that the great residents of Philadelphia are paying 8% sales tax ON their beverage tax.  A $5.99 10-pack of Propel water (which actually doesn’t have any sugar, ironically), now costs $9.75.  This particular individual was stunned to see the cost, so they voided the transaction. And I don’t blame them.

Who Loses from the Soda Tax?

When you consider what the Philadelphia soda tax is meant to accomplish, there are two clear cut losers:

  1. The Sugar / Sports Beverage Industry – With the cost of everyday drinks like Gatorade and Pepsi being increased by as much as 150% (depending on the size of the container), the beverage industry is going to see a steep decline in demand.  There’s just no way around it. When you were paying $.30 for a 12oz can of Coca Cola at the grocery store and now are paying $0.48 cents a can, there will be a group of people that say “No, thanks.”   This decline in demand will, of course, be limited to just the city of Philadelphia. If the merits of this tax are well publicized in the coming months, though, other cities could join in for the added revenue.
  2. The Wallets of the American Consumer – I wouldn’t call myself an addict when it comes to drinking soda or sports beverages. But when they go on sale at the grocery store, I’ve been known to buy them in quantity (“four 12-packs for $10” happens a few times a year, and I like to buy just that many).  If there’s 144 ounces per case of 12 cans, that’s 576 ounces of soda in my $10 purchase.  In Philadelphia, my $10 purchase is now an $18.64 purchase… and that’s not good for my wallet.  The same goes for consumers who spend $1.99 on a gallon of iced tea (now with an additional tax of $1.92) or a liter of Mountain Dew (plus the new tax of $0.51).  Consumers will lose more money for buying the same everyday items.

Who Wins from the Soda Tax?

Once again I can find two clear cut examples of positive outcomes from the Philadelphia beverage tax:

  1. Early Childhood Education & City Programs – The city of Philadelphia anticipates that $91 million annually will be collected from this soda tax, and the majority of that money will go to fund early childhood education, parks, and libraries.  The remaining funds (roughly 20%) will target other city programs and employee benefits.  The sum raised is not as much as you might anticipate given just how much the cost of beverages will increase, but remember this is strictly for one city.
  2. The Health of the American Consumer – Allow me to speak from experience: the sheer amount of sugar in my beloved bottle of Snapple Apple is more than I should likely be consuming in a week, let alone in 15 minutes.  The reason these drinks taste as delicious as they do is because they are dripping with the sweet stuff. Philadelphia is not only looking at a new revenue source, but a way to tackle diabetes and obesity.  A “sin tax” has always been defined as a tax on things like gambling, tobacco, and alcohol, but it would appear we may be getting ready to add sugar and sports drinks to the list.  If this ever reaches Connecticut, the increased cost may just be enough to get me to start drinking water exclusively (or at least a LOT more than I do).

Grocery stores in the city are doing different things in order to inform consumers their drinks are going up in price.  Some list the full price on the sticker below the item on the shelves, some have sent out notices in their circulars, and others have decided to avoid the subject. The latter are just ringing up surprised consumers at the register, which I wouldn’t imagine going over too well for those not paying attention.

Philadelphia makes up roughly 0.5% of the entire US Population. So, while this is just one city, it’s a big one. This tax is now on the minds of 1.55 million people.

Keep an eye on this tax to see if your city adopts a similar policy and plan for a healthier lifestyle to keep your wallet and your waistline in check.

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credit-karma-tax-softwareThe first time I filed my very own taxes was with Turbo Tax, back in 2003. I was 18 years old at the time, attending college, and it was the first year my parents could not claim me as a dependent.

I had earned a fair amount of income from my jobs on campus (and my summer job) and Turbo Tax was of great help.  Living in Florida, I (luckily) didn’t have to worry about state filing costs… the entire experience of entering two W-2s and getting a refund took all of 10 minutes.  It was exactly as advertised, and I was 100% satisfied.

Before I knew it, however, my tax situation became more and more complicated.  I started my own business, began saving a small amount for retirement, got married, had children, bought a house, started a second business … the basic version of Turbo Tax wasn’t cutting it.  Upgraded versions started costing serious money (upwards of $100). Plus, even more money to file my state taxes, now that I live in Connecticut instead of Florida.  It has actually become better for me to have a CPA handle my taxes each year, rather than worry about screwing it up myself while still paying $150 via Turbo Tax or H&R Block.

Well, in a new and very surprising move — at least to this financial blogger– Credit Karma now offers FREE tax software for almost every American taxpayer.  And when I say FREE, I mean it costs absolutely nothing to file both your Federal and State tax returns. No matter your individual (very important) tax situation, there’s no charge when you open an account, no charge when you file, and no charge whether you’re reporting $45,000,000 or $45,000.  (**If you own a small business that files S corp, C corp, partnership, or multi-member LLC paperwork, I’m afraid you’re out of luck this year for filing your business taxes. Credit Karma cannot yet file your return — but this won’t be the case forever, says their CEO.)

Some important points to make before talking about how Credit Karma can provide such a service:

  • The software is not yet live but will be in January — you can even “get in line” now to gain access. You will absolutely be able to file your 2016 taxes next year.
  • You must have a CreditKarma.com account (it’s free) in order to utilize their tax filing platform.
  • Your 2016 Federal and State tax returns are due no later than April 18, 2017.
  • You can print and mail your return after completing it using Credit Karma, if you so desire.  You don’t have to e-file if you don’t want to.
  • Filing your return can only be done by logging into their platform; the software cannot be downloaded.

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When Did Credit Karma Become a Tax Software Company?

Earlier this year, Credit Karma purchased a North Carolina based tax preparation company named AFJC Corporation.  AFJC Corporation is a provider of online tax preparation, filing solutions, and related services for individuals, certified tax preparers, and financial institutions.  As a result of this purchase, Credit Karma is opening a new office in Charlotte, NC, entirely focused on their tax prep services.

Before this purchase, Credit Karma was known for being able to provide you with a free credit score, without even requiring a credit card.  Before them, the deal with other credit score providers was that for the first X number of days, you could see your score without charge. After that, though, your free trial period would end and you’d have to pay a monthly service.

Related: How to Get Your Credit Report for Free

Credit Karma didn’t like that system, which all of the other companies were using. They took the idea a step further and decided to make the whole damn thing free.  And as you can see from their new tax platform, it’s kind of their thing to take an existing pay-for service and make it 100% free.

How Can Credit Karma Make Tax Filing Free of Charge?

Credit Karma is likely spending millions of dollars on their new office, millions of dollars to develop the software to be able to provide 100M tax returns, millions of dollars in advertising (I just saw a TV commercial for their new software), and millions of dollars to staff it all, so that if problems arise, they have plenty of support available.  And, of course, they don’t plan to take in a single penny of revenue from tax filers.

What now? How does Credit Karma plan to make money?  Well, every piece of information you provide them when filing your taxes is going to be used to offer you services in those industries.  For example:

  • When you enter your home mortgage interest, you’ll get an email about suitable refinance options. (If you sign up for any of them, Credit Karma gets a commission.)
  • When you enter your business expense report, and show a lot of travel, you’ll get an email about potential travel reward credit cards .(If you are approved for any of them, Credit Karma gets a commission.)
  • When you enter your self employment health care costs, you’ll get an email about other medical insurance providers that might save you money. (If you apply for any of them, Credit Karma gets a commission.)

You get the idea.  Of course, this is something they’ve already been doing when you get your free credit score through CreditKarma.com. Here, though, they’ll be able to do it on a much grander scale, getting (what should be) 100% accurate information about the consumer and pinpointing offers that might suit their needs.  A lot of up front costs now and, if all goes according to plan, a lot of revenue later.

What Happens to Turbo Tax, H&R Block, TaxACT, my CPA…?

If Credit Karma is successful in offering 100% free-of-charge tax returns for tens of millions of Americans, then it’s a grim picture for the names above (and many others not mentioned).  Platforms like Turbo Tax and H&R Block make their revenues from the costs they charge to file taxes, even if some of their services are free.  Seeing as the news is pretty fresh, I would imagine many other companies are getting ready to cut prices drastically in order to keep business for 2017 and beyond.

What if Credit Karma is not successful in this venture and the revenues cannot sustain the business? Then, you’ll likely see an emboldened group of tax prep providers, strengthening their core products and platforms.

As tax season approaches, I plan to update this article with fresh screenshots and information on the Credit Karma tax prep platform. For right now, they offer no other information than to wait.  So, I wait. But be sure to check back in the coming weeks to learn more, as the Credit Karma Tax unveiling gets underway.

Oh, and don’t worry, H&R Block. My parents will still spend $300 to sit down with you for 4 hours, filing their single W-2 with no investment income. (It’s amazing I turned out so well, really.)

 

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Will a Bonus Make You Pay Higher Federal Taxes?

by Luke Landes
bonus

With the holidays approaching, many companies are preparing their bonus checks. However, some employees who are looking forward to their bonuses are also concerned about tax consequences. I gave up this “extra” part of my corporate pay, in exchange for the benefit of working for myself, when I left my day job a few years […]

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401(k) Contribution Limits for 2017

by Luke Landes

The 401(k) contribution limits and maximums are increasing in 2015, and there are other tax changes to 401(k) to note.

2 comments Read the full article →

2017 Federal Income Tax Brackets and Marginal Rates

by Stephanie Colestock

As tax year 2016 comes to a close, your focus is probably on filing that tax return after the new year (remember that your deadline is April 17, 2017). The IRS may end up confusing some people, though, as they just released the tax brackets, deduction limits, and marginal rates for tax year 2017. Keep […]

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2016 Federal Income Tax Brackets and Marginal Rates

by Stephanie Colestock

Can you believe we’re already in September? The year has flown by, and IRS Tax Year 2016 will soon be coming to a close. While your filing deadline isn’t until April 17, 2017 (the 15th will fall on a Saturday), now is the perfect time to begin thinking about your taxes, maxing out your retirement […]

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2017 IRS Standard Deductions and Exemptions

by Luke Landes
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Most taxpayers can choose between itemizing tax deductions to reduce taxable income, which requires accurate record-keeping and support, and taking the standard deduction. The standard tax deduction is a fixed amount that reduces the amount of money on which year-end taxes are calculated. Generally, if you can show that you’ve had more deductible expenses than […]

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2015 Federal Income Tax Brackets and Marginal Rates

by
Taxes

Tax Day 2016 for IRS Tax Year 2015, also known as your return filing deadline, is April 18. If you haven’t yet filed, here are the IRS tax rates for your 2015 earnings with background and commentary. These change from year to year to protect against something the Tax Foundation calls “bracket creep” or when […]

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